Wednesday, September 15, 2010

Civil Theft, Breach of Contract, and Software Development with a Copyright Ownership Defense in Colorado State Court

Commerce Books (small) A recent Colorado Court of Appeals case addresses an interesting situation involving claims by a software company which came up with an idea for a software program and then had a falling out with the company it hired to market and later write the program.  The case is Steward Software Company, LLC v. Kopcho, No. 09CA1690, announced on September 2, 2010.  Specifically, the software company came up with an idea for a banking software and hired the marketing company, and later the developer.  The marketing company signed a nondisclosure agreement which stated that the it did not acquire intellectual property rights under the nondisclosure agreement except for the limited purpose of creating a marketing plan.  However, no written contract was ever signed regarding the marketing work.  Later, a developer was hired, but again, no written contract was signed.

After the initial version of the software was created, the parties had a falling out, apparently when the software company requested significant modifications to the program which took a great deal of time and increased the costs.  The software company decided to withhold payments and the developer ceased work after it registered the copyright for the program.

The software company sued the developer and marketing company for breach of contract, breach of fiduciary duty, conversion, and civil theft, among other things.  During the litigation, the software company apparently argued that the developer and marketer basically stole its trade secret idea and the corresponding program based thereon.  As a part of its defense, the software company and marketer asserted that they owned the copyright in the program, a fact which would defeat at least a portion of the claims regarding whether it stole copyrighted intellectual property, i.e., you can’t steal what you own.

Interesting, the case was removed to federal court on the basis that it raised a federal question, copyright law.  Generally, state courts have no jurisdiction to decide copyright issues as these are preempted by federal law.  However, here, the federal court remanded (sent back to the state court) the case because it held that the raising of the ownership of a copyright as a defense to a state court claim did not raise a federal copyright issue which gave it jurisdiction to hear the matter.

Back at the state court, the trial court did not allow the developer or marketer to instruct the jury on the defense that it owned the copyright and therefore could not have stolen the copyrighted intellectual property.  The jury determined that the developer and marketer had stolen something and awarded damages, but it was impossible to tell what exactly the jury believed had been stolen and whether this included the copyrighted materials.

The Colorado Court of Appeals held that one of the errors of the trial court was to fail to instruct the jury on the copyright ownership defense and remanded (sent it back to the trial court) the case.

This opinion case raises several points businesses should consider.

Should Have Created a Written Contract

First, as is a theme on this blog, the parties should have taken the time to draft and agree to a written contract.  Initially, no one expects that their relationship will break down, but when it does, a written contract can be invaluable.  For example, a written contract done well, would likely have addressed the scope of work and payment so that the contract could have provided a more efficient and cost effective way to deal the very sort of conflicts that gave rise to the falling out in this case.  It could have not only identified rights and obligations, but also addressed the modification process, cost or time limitations, liability limitations and so on.

Fork in the Road (small) In addition, a well written contract dealing with intellectual property issues most likely would specifically address the ownership of the intellectual property at issue.  For example, here, the question arises whether the software program developed by the developer was done for hire, a determination which affects ownership.  There is also a question as to the scope of the trade secret idea which gave rise to the program, who owned that, and who owned derivations arising from the idea, and to what extent.  Because there is no written contract to review regarding the roles, expectations, and intellectual property at issue, the issues get confused and it is likely nobody gets what they really wanted, and certainly not for the right price.

Who Owns the Copyright, Works for Hire

Second, in general, copyrights vest in the author of the work at issue. See 17 USC Section 201(a).  However, works made for hire vest in the hiring party, if done as an employee within the scope of employment, or as a part of a contract where the parties expressly agree in writing, signed by them, that the work is considered for hire.  See 17 USC Section 101.  When hiring someone to generate copyrightable work in a non-employment situation, it is important to make sure you specifically get the copyright in writing, or it likely rests with the authoring party.  Likewise, when hired to create copyrightable material, one should be deliberate about providing the specific rights one is giving away, while specifically retaining the others, and pricing the work accordingly.  Lack of clarification can create some ugly situations.

Emphasis on Trade Secrets

Third, the case seems to highlight the potential good use of trade secrets to control derivative development of products and intellectual property.  An idea is not able to be protected under copyright.  Old Key (small) However, a trade secret can be an idea, and can be protected, so long as it is secret and controlled.  In contrast, copyrights adhere to the original work of authorship.  As a result, while an idea is not copyrightable, the program, art, or literature that expresses the idea is copyrightable to the extent it is original.

What can happen, then, with appropriate contractual planning, is that the trade secret owner can keep control of the idea and use it to obtain a copyrightable product without releasing its advantage in the market related to its trade secret.

On the other hand, bad contractual planning can result in one party owning the trade secret, but failing to get the rights to the end result intellectual property.  The developer arguably cannot use the product without concerns about misappropriate of the trade secret, but the trade secret owner cannot use the resulting intellectual property either.  In short, the trade secret owner can spend a lot of money creating something they cannot use, while the copyright owner can demand more money to license the resulting product which is only really valuable to the trade secret owner. 

Copyright Defense in State Court

Finally, the case seems to indicate that in a copyright related matter, a plaintiff with state court claims such as misappropriation of trade secrets or violation of a non-disclosure or non-compete agreement can remain in state court by electing to not pursue copyright infringement claims which may be weak.  It also seems to mean that a defendant can still raise copyright related defenses even if they are not in federal court.  This would be important on the one side when a plaintiff wants to limit its litigation expenses and focus on stronger claims unrelated to its possible copyright claims to protect a market, a business model, or to reserve future investment opportunities, and, on the other side, if a defendant has copyrights, even unrelated copyrights, which can limit its exposure to liability.


Regardless of how one looks at this case, it seems apparent that the appropriate use of, and planning with, contractual relationships involving intellectual property is key.  Such use can significantly reduce costs and exposure to potential liability later on, allowing businesses to make informed decisions regarding product development, marketing, and investment.

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